T.C. Memo. 2009-170
UNITED STATES TAX COURT
GARY W. SWANSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14032-06. Filed July 15, 2009.
Vivian D. Hoard, for petitioner.
Brenda M. Fitzgerald, for respondent.
MEMORANDUM OPINION
GOEKE, Judge: The instant matter is before the Court on
petitioner’s amended motion for litigation costs under section
7430.1 The issue we must decide is whether petitioner is
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
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entitled to litigation costs pursuant to sections 7430 and
6673(a)(2)(B). For the reasons stated herein, we find that
petitioner did not submit a qualified offer, that respondent’s
position was substantially justified in opposing petitioner’s
claim of reasonable cause, and that respondent did not
unreasonably multiply the proceedings in this case. Thus, we
hold that petitioner is not entitled to an award of litigation
costs. This Court ruled in favor of petitioner in Swanson v.
Commissioner, T.C. Memo. 2009-31, and we incorporate herein the
facts set forth in that opinion.
Background
This case involves petitioner’s 1983 tax year. Petitioner
invested in California Jojoba Ventures (California Jojoba), a
jojoba plant partnership, in 1983. Petitioner was required to
invest $19,250. Petitioner invested $5,000 of his own money and
signed a promissory note for the remaining $14,250. Shortly
thereafter California Jojoba requested additional funding from
its partners, but petitioner refused to contribute any additional
funds. Petitioner claimed a $13,017 net loss from California
Jojoba on Schedule E, Supplemental Income Schedule, attached to
his Form 1040, U.S. Individual Income Tax Return, for 1983.
On October 3, 1991, respondent sent a notice of final
partnership administrative adjustment (FPAA) for the 1983 taxable
year to the tax matters partner of California Jojoba. The FPAA
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disallowed claimed research and development costs and disallowed
$443,198 of California Jojoba’s claimed loss.
A petition on behalf of California Jojoba was filed on
December 23, 1991. On November 1, 1993, the parties in Cal.
Jojoba Investors v. Commissioner, docket No. 29993-91, filed a
stipulation to be bound setting forth their agreement that the
outcome of this case was to be determined by the result reached
in Utah Jojoba I Research v. Commissioner, docket No. 7619-90.
On January 5, 1998, the Court issued an opinion in that case
sustaining respondent’s adjustments, and a decision was entered
on January 8, 1998. See Utah Jojoba I Research v. Commissioner,
T.C. Memo. 1998-6 (Utah Jojoba I).
On February 25, 1999, respondent filed a motion for entry of
decision or to appoint a tax matters partner in the case at
docket No. 29993-91, asserting that pursuant to the stipulation
to be bound, a decision should be entered in accord with the
Court’s holding in Utah Jojoba I or, in the alternative, that a
new tax matters partner be appointed.
On April 11, 2005, the Court’s order to show cause was
deemed absolute, and respondent’s motion for entry of decision
was granted. The Court further ordered that the partnership item
adjustments for California Jojoba’s 1983 taxable year were
correct as determined and set forth in the FPAA dated October 3,
1991.
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Respondent examined petitioner’s 1983 tax return and
disallowed the claimed loss relating to petitioner’s investment
in California Jojoba. On April 17, 2006, respondent issued the
affected items notice of deficiency with respect to petitioner’s
1983 tax year imposing the section 6653(a)(1) and (2) additions
to tax. On July 21, 2006, petitioner timely filed a petition
with this Court alleging that respondent erred in imposing the
additions to tax.2 A trial was held on December 13, 2007, at the
Court’s trial session in Atlanta, Georgia. Petitioner, in
addition to arguing that he was not negligent in his reporting of
the California Jojoba loss on his income tax return, argued at
trial and on brief that he was not liable for section 6621 tax-
motivated interest.
In Swanson v. Commissioner, supra, we held that petitioner
was not liable for the section 6653(a)(1) and (2) negligence
additions to tax, but we found that we did not have jurisdiction
to determine whether petitioner was liable for the section 6621
tax-motivated interest. On February 11, 2009, a decision was
entered implementing the findings of Swanson.
On March 16, 2009, petitioner filed a motion for litigation
costs pursuant to Rule 230 and sections 7430 and 6673(a)(2)(B).
On March 23, 2009, we issued an order vacating our decision.
2
On Sept. 5, 2007, petitioner filed his petition in docket
No. 20151-07 for a review of respondent’s refusal to abate
interest pursuant to sec. 6404.
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On April 2, 2009, petitioner filed an amended motion for
litigation costs. Petitioner’s amended motion provides that
petitioner has paid $5,351.63 in fees and expenses. Petitioner’s
amended motion requests that we: (1) Assess litigation costs
against respondent in the amount of $250 per hour plus expenses;
(2) award costs and fees to petitioner in the amount of $5,351.63
for fees already paid; and (3) award costs to petitioner’s
counsel in the amount of $46,888.33. On May 27, 2009, respondent
filed a response and objection to petitioner’s amended motion for
litigation costs. Because the parties’ pleadings provide the
facts necessary to decide this motion, no hearing is necessary.
Discussion
Section 7430(a) authorizes the award to a prevailing party
of reasonable litigation costs paid or incurred in a court
proceeding which is brought by or against the United States in
connection with the determination, collection, or refund of any
tax, interest, or penalty under the Internal Revenue Code. The
taxpayer must establish that he: (1) Is the prevailing party;
(2) has exhausted the available administrative remedies; (3) has
not unreasonably protracted the court proceedings; and (4) has
claimed litigation costs that are reasonable. Sec. 7430(a) and
(b)(1), (3).
The moving party bears the burden of proving that these
requirements are met. Rule 232(e). A taxpayer is generally the
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prevailing party if the taxpayer substantially prevailed with
respect to either the amount in controversy or the most
significant issue or set of issues. Sec. 7430(c)(4)(A). Under
section 7430(c)(4)(B), even if the taxpayer meets the
requirements of a prevailing party under section 7430(c)(4)(A),
the taxpayer will not be treated as a prevailing party if the
Commissioner’s position in the proceeding was substantially
justified.
Under section 7430(c)(4)(E)(i), a party shall also be
treated as the prevailing party if “the liability of the taxpayer
pursuant to the judgment in the proceeding (determined without
regard to interest) is equal to or less than the liability of the
taxpayer which would have been so determined if the United States
had accepted a qualified offer of the party under subsection
(g).” The qualified offer provision of section 7430(c)(4)(E)(i)
applies without regard to whether the Commissioner’s position in
the matter is substantially justified. See Haas & Associates
Accountancy Corp. v. Commissioner, 117 T.C. 48, 59 (2001), affd.
55 Fed. Appx. 476 (9th Cir. 2003); Estate of Lippitz v.
Commissioner, T.C. Memo. 2007-293.
A qualified offer is defined in section 7430(g)(1) as a
written offer which:
(A) is made by the taxpayer to the United States during
the qualified offer period;
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(B) specifies the offered amount of the taxpayer’s
liability (determined without regard to interest);
(C) is designated at the time it is made as a qualified
offer for purposes of this section; and
(D) remains open during the period beginning on the
date it is made and ending on the earliest of the date the
offer is rejected, the date the trial begins, or the 90th
day after the date the offer is made.
Petitioner’s offer in effect was that he would pay the
underlying liability and the statutory interest on the deficiency
but would not have to pay the negligence additions to tax under
section 6653 and tax-motivated interest pursuant to section 6621.
Respondent argues that petitioner’s offer was not a qualified
offer because the offer included the section 6621 tax-motivated
interest. Respondent contends that the inclusion of tax-
motivated interest was incorrect because a qualified offer cannot
include interest unless the taxpayer’s liability for interest is
a contested issue in an administrative or court proceeding.
As we found in Swanson v. Commissioner, T.C. Memo. 2009-31,
we lacked jurisdiction in this proceeding to determine whether
petitioner is liable for section 6621(c) tax-motivated interest.
Respondent points to this finding and argues that because we
lacked jurisdiction over that interest and because a qualified
offer can include only items that are contested issues,
petitioner’s inclusion of tax-motivated interest renders his
offer invalid.
Petitioner’s offer provided that
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[Petitioner] makes this qualified offer pursuant to
[section] 7430 to pay the underlying tax and any interest
determined at the conclusion of a separate proceeding
involving interest. Mr. Swanson does not owe negligence
penalties. For the same reason, he would not owe any tax-
motivated interest either.
Section 7430(g)(1)(B) provides that an offer which is a
qualified offer specifies the offered amount of the taxpayer’s
liability determined without regard to interest. Section
301.7430-7(c)(3), Proced. & Admin. Regs., provides that the
amount of a qualified offer must be with respect to all of the
adjustments at issue in an administrative or court proceeding at
the time the offer is made and only those adjustments.
Accordingly, section 301.7430-7(c)(3), Proced. & Admin. Regs.,
provides that an offer will not be considered a qualified offer
if it includes interest, unless interest is a contested issue.
We lacked jurisdiction in this deficiency case to determine
whether petitioner was liable for tax-motivated interest pursuant
to section 6621. See Swanson v. Commissioner, supra.
Petitioner’s offer did not constitute a qualified offer because
it included interest over which we lacked jurisdiction. See sec.
301.7430-7(c)(3), Proced. & Admin. Regs. Petitioner has filed
another petition with this Court challenging respondent’s
determination not to abate pursuant to section 6404(e) the
section 6621(c) tax-motivated interest. See Swanson v.
Commissioner, docket No. 20151-07. Accordingly, petitioner’s
offer was not a qualified offer.
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Further, even if we were to treat petitioner’s offer as a
qualified offer, petitioner would not be treated as the
prevailing party because petitioner’s tax liability after our
decision in Swanson v. Commissioner, T.C. Memo. 2009-31, was not
less than his qualified offer. See sec. 7430(c)(4)(E)(i). Had
respondent accepted petitioner’s qualified offer, petitioner
would not have been liable for either the section 6653 negligence
penalty or the section 6621 tax-motivated interest. As a result
of our decision in Swanson, petitioner was not liable for the
section 6653 negligence penalty, but he remains liable for the
section 6621 tax-motivated interest. Petitioner’s liability
after Swanson is thus higher than that contained in his qualified
offer, and petitioner would not be treated as the prevailing
party. See sec. 7430(c)(4)(E)(i).
Because petitioner did not submit a qualified offer, his
request for litigation fees will fail if respondent establishes
that respondent’s position was substantially justified. See sec.
7430(c)(4)(B). Respondent argues that his position was
substantially justified. In general, the Commissioner’s position
is substantially justified if, on all of the facts and
circumstances and the legal precedents relating to the case, the
Commissioner acted reasonably. Pierce v. Underwood, 487 U.S. 552
(1988); Sher v. Commissioner, 89 T.C. 79, 84 (1987), affd. 861
F.2d 131 (5th Cir. 1988). To be substantially justified, the
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Commissioner’s position must have a reasonable basis in both law
and fact. Pierce v. Underwood, supra. A position is
substantially justified if the position is “justified to a degree
that could satisfy a reasonable person.” Pierce v. Underwood,
supra at 565 (construing similar language in the Equal Access to
Justice Act). Thus, the Commissioner’s position may be incorrect
but nevertheless be substantially justified “‘if a reasonable
person could think it correct’.” Maggie Mgmt. Co. v.
Commissioner, 108 T.C. 430, 443 (1997) (quoting Pierce v.
Underwood, supra at 566 n.2).
The relevant inquiry is whether the Commissioner’s position
was reasonable given the known facts and circumstances at the
time that the Commissioner took his position, as well as any
applicable legal precedents. Maggie Mgmt. Co. v. Commissioner,
supra at 443; DeVenney v. Commissioner, 85 T.C. 927, 930 (1985).
The position of the United States under consideration with
respect to the recovery of litigation costs is the position taken
by the Commissioner in the answer to the petition. Bertolino v.
Commissioner, 930 F.2d 759, 761 (9th Cir. 1991). Respondent has
maintained the same position throughout: that petitioner was
negligent in his reporting of the jojoba partnership loss. See
Maggie Mgmt. Co. v. Commissioner, supra at 442.
Respondent argues that his position was reasonable in the
light of then-existing legal precedent. Respondent further
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contends that the facts could have supported a finding that
petitioner was negligent. Respondent points to his arguments at
and after the trial that petitioner’s lack of experience and his
knowledge of potential tax benefits required him to obtain an
additional opinion on the investment. Respondent contends that
those facts could have supported a finding of negligence in view
of caselaw at the time this case was tried.
Respondent’s position was reasonable throughout the time he
took it and maintained it given the known facts and
circumstances. See Hennessey v. Commissioner, T.C. Memo. 2007-
131, affd. without published opinion 102 AFTR 2d 2008-6750,
2008-2 USTC par. 50,623 (5th Cir. 2008); Vasquez v. Commissioner,
T.C. Memo. 2007-6, affd. 284 Fed. Appx. 381 (9th Cir. 2008). A
reasonable person could think that respondent’s position was
correct on the basis of precedent at that time. Other jojoba
partnership cases with similar but not identical facts have
resulted in the negligence additions to tax being upheld. See,
e.g., Helbig v. Commissioner, T.C. Memo. 2008-243; Heller v.
Commissioner, T.C. Memo. 2008-232; Welch v. Commissioner, T.C.
Memo. 2002-39; Christensen v. Commissioner, T.C. Memo. 2001-185;
Serfustini v. Commissioner, T.C. Memo. 2001-183; Nilsen v.
Commissioner, T.C. Memo. 2001-163; Hunt v. Commissioner, T.C.
Memo. 2001-15; Glassley v. Commissioner, T.C. Memo. 1996-206.
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Accordingly, respondent’s position was substantially
justified, and petitioner is not entitled to litigation costs.
See sec. 7430(c)(4)(B)(i); Hennessey v. Commissioner, supra;
Vasquez v. Commissioner, supra.
Petitioner also seeks fees pursuant to section
6673(a)(2)(B), which allows this Court to award attorney’s fees
and costs when an attorney appearing on behalf of the
Commissioner of Internal Revenue has multiplied the proceedings
in any case unreasonably and vexatiously. Respondent’s counsel
has not multiplied the proceedings in this case unreasonably, and
petitioner is not entitled to fees pursuant to section
6673(a)(2)(B).
Based on the foregoing,
An appropriate order and
decision will be reentered.